September 5, 2008 / 9:23 AM / 11 years ago

Goldman cuts Merrill to "sell," sees new writedowns

NEW YORK (Reuters) - Merrill Lynch & Co Inc MER.N, battered by over $40 billion in write-downs, will incur fresh write-downs, according to a Goldman Sachs research report, and its shares dropped 3.2 percent on Friday.

A Merrill Lynch sign is seen in Toronto, April 29, 2008. REUTERS/Mark Blinch

Goldman analyst William Tanona downgraded the stock to a “sell” and reduced his third-quarter estimate by $1 to a loss of $5.75.

Merrill, the world’s largest brokerage, said last month it would need to take additional write-downs of more than $5 billion in the third quarter after it sold about $30 billion in repackaged debt to Lone Star Funds.

Tanona, however, expects Merrill to post even more write-downs, and he added the stock to his Americas conviction sell list.

Tanona said the stock currently trades at the highest price-to-book multiple in his large-cap brokerage universe, despite having some of the most significant exposures to troubled assets like collateralized debt obligations, mortgages and leveraged loans.

_We expect Merrill’s multiple to compress over the coming weeks and months, as third-quarter earnings will mark the fifth consecutive quarterly loss for the company, and its prospects for the fourth quarter of 2008 are not promising enough to warrant this level of a premium to book value,” he wrote in a Thursday note to clients.

Tanona cited expectations of higher compensation expense alongside his outlook for large gross write-downs as the reason for his downgrade. He also widened his 2008 loss estimate to $11.55 a share from $10.25.

He also cited a fine of $125 million that the brokerage is due to pay to settle a regulatory dispute over sales of the debt instruments known as auction-rate securities, and the cost of buying them back from retail investors.

The analyst cut his six-month price target on the stock to $22 from $28.50.

The stock was down 84 cents at $25.37 in early trading on the New York Stock Exchange.

Merrill shares have fallen more than 50 percent since the start of the year.

Reporting by Tenzin Pema in Bangalore and Elinor Comlay in New York; Editing by Jarshad Kakkrakandy/Jeffrey Benkoe

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